Vestjysk Bank Plunges as Auditors Warn Capital Plan Must Work

Vestjysk Bank A/S (VJBA), which is $39
million away from insolvency, plunged in Copenhagen trading as
its internal auditors warned the bank’s plans to raise capital
contain no room for error.

If they fail, “there is a significant risk that the bank
will not be able to continue operating,” the auditors said
yesterday in the bank’s earnings report. The Nasdaq OMX stock
exchange placed Vestjysk shares and bonds on the observation
list today, citing the auditors’ report. The stock fell as much
as 16 percent, the most since Feb. 4.

Denmark’s sixth-largest listed lender increased writedowns
by 54 percent last year, plagued by agricultural and property
loans, some inherited when the bank took over Aarhus Lokalbank
A/S last year in a merger ushered by the government. The Lemvig,
Denmark-based bank yesterday reported a more than three-fold
increase in 2012 net losses to 1.45 billion kroner ($253
million).

Vestjysk’s results are “hardly a shock” and reflect the
growing chasm between Denmark’s stronger institutions and those
still struggling after a burst property bubble, said Torben Jensen, chief dealer at debt capital markets at Copenhagen-based
Nykredit A/S.

“The results that are coming out from the smaller banks
now are generally very good or they are very bad,” Jensen said.
“The accountants are taking a tougher look at the balance
sheets now, so we’ll probably see the true picture now.”

Hybrid Debt

Property values in Denmark have dropped at least 20 percent
since peaking in 2007, with farms and commercial property
developments particularly hard hit. Vestjysk wrote down 12
percent of its total loan book in 2012, and said it continues to
hold a “relatively large number” of weak commitments.

The writedowns have eroded the bank’s capital. Vestjysk
said it had capital of 2.78 billion kroner as of Dec. 31, while
the country’s bank regulators require it to hold 2.56 billion
kroner. The bank is considering converting to shares some or all
of 1.2 billion kroner in hybrid debt held by the government to
bolster its solvency.

The Financial Supervisory Authority last year tightened
requirements for calculating solvency. Yet to avert closing down
banks that faced temporary setbacks, the FSA said it would give
lenders that fall below required thresholds more than 48 hours
to come up with the extra capital.

The FSA exercised that option yesterday for the first time
when Internet lender Basisbank A/S failed to meet its solvency
requirements after being told by the FSA to write down more
loans. The lender was ordered to devise a capital recovery plan.

Vestjysk shares fell 10 percent to 8.1 kroner at 3:34 p.m.
local time. The stock has lost 97 percent since a June 2007
peak.